Texas Property and Casualty
Insurance Licensing Examination
Comprehensive Practice Exam
150 Questions — 11 Knowledge Domains
Exam Period: 2026–2027
Prepared in accordance with Texas Department of Insurance (TDI)
and Pearson VUE testing standards
,Domain 1: Insurance Fundamentals & Policy Concepts
Q1. Which type of risk involves only the possibility of loss with no chance for gain?
A. Pure risk
B. Speculative risk
C. Fundamental risk
D. Particular risk
Rationale: Pure risk involves only the possibility of loss or no change—it offers no opportunity for
financial gain. Insurance is designed to address pure risks only, such as the risk of fire damaging
a home.
Q2. A homeowner purchases flood insurance through the NFIP. Which risk
management method does this primarily represent?
A. Risk avoidance
B. Risk reduction
C. Risk sharing
D. Risk retention
Rationale: Purchasing insurance is a risk-sharing (transfer) method. The insured transfers the
financial burden of potential loss to the insurer in exchange for a premium, distributing risk
across a pool of policyholders.
Q3. Which principle states that an insured should not profit from an insured loss but
should be restored to approximately the same financial position as before the loss?
A. Utmost Good Faith
B. Insurable Interest
C. Principle of Indemnity
D. Principle of Subrogation
Rationale: The principle of indemnity ensures that insurance restores the insured to their pre-loss
financial condition without allowing a profit. This prevents moral hazard and is a cornerstone of
property insurance.
Q4. An individual purchases a fire insurance policy on a neighbor's home and collects
after a fire. Under which principle would this claim likely be denied?
A. Indemnity
B. Insurable Interest
, C. Subrogation
D. Utmost Good Faith
Rationale: Insurable interest requires that the policyholder stand to suffer a direct financial loss if
the insured property is damaged. A person cannot insure a stranger's property because there is
no legitimate financial interest at stake.
Q5. After an insurance company pays a claim for property damage caused by a third
party, the insurer pursues recovery from that responsible third party. This describes
which principle?
A. Indemnity
B. Contribution
C. Subrogation
D. Utmost Good Faith
Rationale: Subrogation allows the insurer, after paying a claim, to step into the shoes of the
insured and pursue recovery from the party legally responsible for the loss. This prevents the
insured from collecting twice and holds the at-fault party accountable.
Q6. Which of the following is NOT a characteristic of an insurance contract?
A. Aleatory
B. Unilateral
C. Personal
D. Adhesive
Rationale: An insurance contract is aleatory (values exchanged are unequal), unilateral (only the
insurer is legally bound to perform), conditional (performance depends on policy conditions), and
adhesive (prepared by the insurer). 'Personal' is not one of the standard four distinguishing
characteristics of insurance contracts.
Q7. A fire in a commercial kitchen spreads and destroys the dining area. The insurer
determines the fire was the direct and continuous cause of the loss. This is an
application of which doctrine?
A. Proximate cause
B. Subrogation
C. Contribution
D. Indemnity
, Rationale: The doctrine of proximate cause identifies the primary, direct cause of a loss without
which the loss would not have occurred. In this case, the fire was the proximate cause of the
damage to the dining area, triggering coverage.
Q8. A building insured for $200,000 has a replacement cost of $400,000 and suffers
$100,000 in fire damage. If the policy pays on an actual cash value (ACV) basis and
the building has depreciated 50%, how much will the insurer pay?
A. $50,000
B. $75,000
C. $100,000
D. $200,000
Rationale: ACV is calculated as replacement cost minus depreciation. The ACV of the building is
$400,000 × 50% = $200,000. The policy covers up to $200,000 on an ACV basis. The loss of
$100,000 in ACV terms is $100,000 × 50% depreciation = $50,000.
Q9. A property owner has two insurance policies covering the same building. If both
policies have pro rata liability clauses, how will a $60,000 loss be shared if Policy A
covers $100,000 and Policy B covers $200,000?
A. Policy A pays $20,000; Policy B pays $40,000
B. Policy A pays $30,000; Policy B pays $30,000
C. Policy A pays $40,000; Policy B pays $20,000
D. Only Policy B pays $60,000
Rationale: Under the principle of contribution with pro rata clauses, each insurer pays a
proportionate share based on its policy limit relative to total coverage. Policy A pays $60,000 ×
(100,000/300,000) = $20,000; Policy B pays $60,000 × (200,000/300,000) = $40,000.
Q10. In an insurance contract, the concept of uberrimae fidei (utmost good faith)
requires which of the following?
A. Both parties must disclose all material facts
B. Only the insurer must act in good faith
C. The insured may withhold information that is not requested
D. Only the agent must disclose all material information
Rationale: Uberrimae fidei (utmost good faith) is a fundamental principle requiring both the
insurer and the insured to disclose all material facts relevant to the contract. Failure to disclose
material information can void the policy.
Insurance Licensing Examination
Comprehensive Practice Exam
150 Questions — 11 Knowledge Domains
Exam Period: 2026–2027
Prepared in accordance with Texas Department of Insurance (TDI)
and Pearson VUE testing standards
,Domain 1: Insurance Fundamentals & Policy Concepts
Q1. Which type of risk involves only the possibility of loss with no chance for gain?
A. Pure risk
B. Speculative risk
C. Fundamental risk
D. Particular risk
Rationale: Pure risk involves only the possibility of loss or no change—it offers no opportunity for
financial gain. Insurance is designed to address pure risks only, such as the risk of fire damaging
a home.
Q2. A homeowner purchases flood insurance through the NFIP. Which risk
management method does this primarily represent?
A. Risk avoidance
B. Risk reduction
C. Risk sharing
D. Risk retention
Rationale: Purchasing insurance is a risk-sharing (transfer) method. The insured transfers the
financial burden of potential loss to the insurer in exchange for a premium, distributing risk
across a pool of policyholders.
Q3. Which principle states that an insured should not profit from an insured loss but
should be restored to approximately the same financial position as before the loss?
A. Utmost Good Faith
B. Insurable Interest
C. Principle of Indemnity
D. Principle of Subrogation
Rationale: The principle of indemnity ensures that insurance restores the insured to their pre-loss
financial condition without allowing a profit. This prevents moral hazard and is a cornerstone of
property insurance.
Q4. An individual purchases a fire insurance policy on a neighbor's home and collects
after a fire. Under which principle would this claim likely be denied?
A. Indemnity
B. Insurable Interest
, C. Subrogation
D. Utmost Good Faith
Rationale: Insurable interest requires that the policyholder stand to suffer a direct financial loss if
the insured property is damaged. A person cannot insure a stranger's property because there is
no legitimate financial interest at stake.
Q5. After an insurance company pays a claim for property damage caused by a third
party, the insurer pursues recovery from that responsible third party. This describes
which principle?
A. Indemnity
B. Contribution
C. Subrogation
D. Utmost Good Faith
Rationale: Subrogation allows the insurer, after paying a claim, to step into the shoes of the
insured and pursue recovery from the party legally responsible for the loss. This prevents the
insured from collecting twice and holds the at-fault party accountable.
Q6. Which of the following is NOT a characteristic of an insurance contract?
A. Aleatory
B. Unilateral
C. Personal
D. Adhesive
Rationale: An insurance contract is aleatory (values exchanged are unequal), unilateral (only the
insurer is legally bound to perform), conditional (performance depends on policy conditions), and
adhesive (prepared by the insurer). 'Personal' is not one of the standard four distinguishing
characteristics of insurance contracts.
Q7. A fire in a commercial kitchen spreads and destroys the dining area. The insurer
determines the fire was the direct and continuous cause of the loss. This is an
application of which doctrine?
A. Proximate cause
B. Subrogation
C. Contribution
D. Indemnity
, Rationale: The doctrine of proximate cause identifies the primary, direct cause of a loss without
which the loss would not have occurred. In this case, the fire was the proximate cause of the
damage to the dining area, triggering coverage.
Q8. A building insured for $200,000 has a replacement cost of $400,000 and suffers
$100,000 in fire damage. If the policy pays on an actual cash value (ACV) basis and
the building has depreciated 50%, how much will the insurer pay?
A. $50,000
B. $75,000
C. $100,000
D. $200,000
Rationale: ACV is calculated as replacement cost minus depreciation. The ACV of the building is
$400,000 × 50% = $200,000. The policy covers up to $200,000 on an ACV basis. The loss of
$100,000 in ACV terms is $100,000 × 50% depreciation = $50,000.
Q9. A property owner has two insurance policies covering the same building. If both
policies have pro rata liability clauses, how will a $60,000 loss be shared if Policy A
covers $100,000 and Policy B covers $200,000?
A. Policy A pays $20,000; Policy B pays $40,000
B. Policy A pays $30,000; Policy B pays $30,000
C. Policy A pays $40,000; Policy B pays $20,000
D. Only Policy B pays $60,000
Rationale: Under the principle of contribution with pro rata clauses, each insurer pays a
proportionate share based on its policy limit relative to total coverage. Policy A pays $60,000 ×
(100,000/300,000) = $20,000; Policy B pays $60,000 × (200,000/300,000) = $40,000.
Q10. In an insurance contract, the concept of uberrimae fidei (utmost good faith)
requires which of the following?
A. Both parties must disclose all material facts
B. Only the insurer must act in good faith
C. The insured may withhold information that is not requested
D. Only the agent must disclose all material information
Rationale: Uberrimae fidei (utmost good faith) is a fundamental principle requiring both the
insurer and the insured to disclose all material facts relevant to the contract. Failure to disclose
material information can void the policy.
